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A Note on Disqualification of a Director under section 274 (1) (G) of the Companies Act, 1956


Ajay Mishra 
posted on 17 April 2012



PURPOSE OF THE DISQUALIFICATION

 

The Department of Company Affairs vide its General Circular No. 2/5/2001-CL.V, clarifies that the provisions of section 274 of the Companies Act, 1956 were amended through Companies (Amendment) Act, 2000, w.e.f. 13-12-2000 and a new clause (g) was inserted to sub-section(1) of this section. Through this clause a director of the public company, which has made default in filing of annual accounts and annual returns and in repaying deposits/interest thereon on due date or redeeming its debentures on due date or in paying dividend for period specified in that section, is disqualified to be appointed as a director of other public companies for a period of 5 years from the date such public company so defaulted.

 

The intention and purpose of the above amendment was to disqualify the errant directors not only in the defaulting companies but becoming directors in other companies too, protect the investors from mismanagement, ensure compliance in filing of annual accounts and annual returns which are means of disclosure to all stakeholders, increase the compliance rate of filling of the statutory documents and infuse good corporate governance in the regulation of corporate affairs in the country.

 

APPLICABILITY

 

The disqualification stated in clause (g) is confined to directors of Public company only.

 

The word used in section 274(1)(g)  is appointment. Wherever the Legislature has intended that the word appointment should include re-appointment. A proviso to Rule 3(b) provides that both the disqualifications would apply to appointment and re-appointment of a director.

 

EXEMPTION

 

Even though powers have not been delegated to the Government to accord the exemptions, Government companies are exempt from the applicability of section 274(1)(g). The Private Companies are also exempt from the applicability of the Disqualification of Directors Rules, 2003.

 

Nominee directors appointed on the Board of assisted concern or other public companies by (a) public financial institution within the meaning of section 4A of the Companies Act, 1956; (b) Central or State Government; and (c) banking companies are also exempt from the provisions of section 274(1)(g) of the Companies Act, 1956.

 

It may be noted that nominee directors appointed by the public financial institutions and banks constituted under Central enactment and director appointed by BIFR under section 16(4) of the Sick Industrial Companies (Special Provisions) Act, 1985 or by Central Government will not attract this disqualification.

 

Rule 8A has been inserted by Notification No GSR 133(E) dated 3-3-2006, which provides that an application can be made to the Central Government in e-Form-DD-C for seeking exemption from disqualification of a director.

 

This disqualification will not apply to small shareholders’ director because Rule 5 of the Companies (Appointment of Small Shareholders’ Directors) Rules, 2001 has not included this in the list of disqualification applicable to such director

 

COMMENCEMENT OF DISQUALIFICATION

 

All the existing directors of a public company in default other than the directors who have been exempted from application of section 274(1)(g) by the Central Government, will be disqualified for appointment or re-appointment as  director in any other public company from the date on which the default committed by the said company is deemed to crystallize into a disqualification of the directors prescribed under this section.

 

The date of commencement of disqualification under section 274(1)(g) is as under:

 

(a) For non-filing of annual accounts and annual returns: Rule 3(a) of the Disqualification Rules, provides that if a company fails to file the annual accounts and annual returns for any continuous three financial years commencing on or after the first day of April, 1999, persons who are directors on the last due date for filing the annual accounts and annual returns in respect of the last three continuous financial years, shall become disqualified under section 274(1)(g).

 

(b)For failure to repay deposits, etc.: Rule 3(b) of the Disqualification Rules, provides that if a company fails to repay any deposit or interest thereon, or redeem its debentures, or pay any dividend declared on the respective due dates and if such failure continues for a period for one year, all the person who have been directors on the date of expiry of one year after the default has occurred shall stand disqualified under section 274(1)(g).

 

It may be noted that even if a person ceased to be director of the company subsequent to the expiry of one year from the date of occurrence of the date shall stand disqualified. But if a director has resigned before the expiry of one year from the date of occurrence of the default, the disqualification will not visit him.

 

Explanation to Rule 3(b) clarifies that if the non-payment of dividends is due to the reasons of dividend not being claimed or dividend has been kept in a separate bank account as required under section 205A of the Companies Act, 1956 or dividend has been paid into Investor Education and Protection Fund is required under section 205C, it shall not be deemed a failure to make payment of dividend.

 

A director shall attract disqualification under section 274 (1)(g)(A) of the Companies Act, 1956 if and only if a company has defaulted in filing of both ‘annual accounts and annual returns’ for continuous 3 financial years. The legislature has used the word “AND” and not “OR”.

 

IMPLICATION OF DISQUALIFICATION OF DIRECTORS

 

Director of the defaulting public company cannot be appointed as a director of any other public company for a period of 5 years from the date on which the disqualification sets in, in case the disqualification is with reference to non filing of annual accounts and annual return and four years from the commencement of disqualification in the case of default in repayment of deposits, interest on deposits, debentures and dividend as the disqualification commences one year from the date of occurrence of the default.

 

Example 1: If the company fail to file annual accounts and annual return for financial years  2006-07, 2007-08 and 2008-09, he will be disqualified from being appointed as director in any other company for 5 years from the date  the disqualification sets in, i.e. from the commencement of the financial year 2009-10 onwards.

 

Example 2: If a company fails to repay deposits for the financial year 2008-09, he will be disqualified from being appointed as director after one year from the date of disqualification sets in. i.e. from 2009-10 for four years there after.

 

He can continue as a director in other companies till the date on which he is due to retire. He cannot be re-appointed in the vacancy caused on his retirement in the defaulting company.

 

DUTIES AND ROLES

 

Director:  Every person who proposed as director in a public company shall file with the company a declaration in the prescribed form (FORM-DDA) stating that he is not disqualified as per section 274(1)(g). Rule 9 requires a director to file Form-DDA before his appointment or re-appointment.

 

As per the rule, every individual seeking appointment as a director of a new or an existing public company including re-appointment needs to file Form-DDA with the concern company before appointment or re-appointment, as the case may be.

 

In case of an existing company, an individual being appointed as a director as an additional or in casual vacancy or under section 257 of the Act in any general meeting or being re-appointed as a director in any annual general meeting on retirement by rotation or cessation as an individual director has to file Form-DDA with the concern company in addition to other form(s), if any required under the Act prior to seeking appointment or re-appointment

 

Company: Whenever a company fails to file the annual accounts and returns or fails to repay any deposit, interest, dividend or fail to redeem its debentures, the company shall immediately electronically file a return in Form-DD-B with in 30 days of the date of crystallization of the default of the company into a disqualification to the Registrar of the Companies, furnishing therein the names and address of all the directors of the company during the relevant financial year.

 

No unusual abbreviations or short forms shall be used in filling up the Form-DD-B which shall give such details as may be necessary to distinguish and identify each director without any ambiguity. Provided that such director who have been exempted from application of section 274(1)(g) by the Central Government, from time to time, shall be excluded.

 

On receipt of e-Form-DD-B the Registrar shall register the document and make available for inspection to the public and MCA who shall place all the required particulars on its web-site which shall remain there for five years. The Central Government may also publish the names of the disqualified directors in such manner as it may consider appropriate.

 

New clause 8A has been inserted by Notification No GSR 133(E) dated 3-3-2006, which provides that an application can be made to the Central Government in e-Form-DD-C for seeking exemption from disqualification of a director.

 

Auditor: It shall be the duty of the statutory auditors of the appointing company as well as disqualifying company, as required under section 227(3)(f) to report to the members of the company whether any director is disqualified  from being appointed as director under section 274(1)(g) and to furnish a certificate each year as to whether on the basis of his examination of the books and records of the company, any director of the company is disqualified for appointment as a director or not.

 

It shall be the duty of the statutory auditors of the “disqualifying company” as required by section 227(3)(f) to report to the members of the company whether any director in the company has been disqualified during the year from being re-appointed as a director, or being appointed as director in another company under section 274(1)(g).

 

The report is merely a statement of fact and is not an expression of opinion of the auditor. In Pawan Jain v. Hindustan Club Ltd.[2005] 62 SCL 610 (Cal.), the Calcutta High Court has held that for giving this certificate the auditor should make independent investigations and that before certifying a person as disqualified he should be given an opportunity to put forth his views or give representations in this regard.

 

PENALITIES

 

The company and every officer of the company who is in default and such other person, who contravenes any of the provisions of the Disqualification Rules, shall be punishable with fine up to Rs.5000 and a further fine upto Rs. 500 per day of continuing contravention.

 

Thanks & Regards

CS Ajay Mishra

Email: ajaygkp@gmail.com/csajaygkp@gmail.com 


Published in Corporate Law
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